Installing Piano Hinge On Door Question

Quick Question... I'm installing a 2" piano hinge on my 1.25 " thick Teardrop (wall also 1.25") and am not clear on how deep to set the hinge. I know (assume) part of the hinge has to extend out the exterior of the Tear. I've set up a test rig using scrap and at first set the hinge 13/16ths deep. That looked like it stuck out too far. Then I tried setting it 7/8ths. That's pictured below.
Is there a rule or do I just keep using trial and error and my gut?
Also, each side of the blade is 1/16th thick. Is that all that I should route out? That's all I routed out in this scrap test.
But... the whole hinge is 1/4" thick when both sides are parallel -- so should I really route out 1/8th on the door and the wall so that there is no gap between?
Also, each side of the blade is 1/16th thick. Is that all that I should route out? That's all I routed out in this scrap test.